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ECB Signals Possible Rate Cut Prompting Trump Tweets

Posted by hkarner - 19. Juni 2019

Date: 18-06-2019
Source: The Wall Street Journal

U.S. president tweeted his displeasure at Draghi’s suggestion, saying its effect made Europe more competitive with America

SINTRA, Portugal—European Central Bank President Mario Draghi signaled the bank could roll out fresh stimulus as soon as its next policy meeting in July, sending the euro lower against the dollar and prompting an unusual rebuke from U.S. President Trump.

Mr. Draghi said Tuesday that ECB policy makers would consider “in the coming weeks” how to adapt their policy tools “commensurate to the severity of the risk” to the economic outlook. Options include extending the time frame before the next interest-rate increase, a reduction in the already negative policy rate or restarting bond purchases.

“Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA,” Mr. Trump tweeted about three hours after Mr. Draghi’s comments were released.

The criticism came shortly before Fed policy makers were set to begin a two-day meeting in Washington on Tuesday. Mr. Trump has called on the Fed to cut rates and has said in recent interviews he doesn’t have the same regard for the central bank’s traditional independence from politics as other recent U.S. presidents.

Asked in an interview with ABC News’s George Stephanopoulos about whether criticism of Fed Chairman Jerome Powell could undercut Mr. Powell’s credibility, Mr. Trump said, “Yes, I do. But I’m gonna do it anyway.”

Mr. Trump has taken a particularly strong interest in short-run developments in currency markets and has voiced concerns over the strength of the U.S. dollar. Those concerns reflect Mr. Trump’s broader view that global trade can be a zero-sum game, in which the gains of one nation come at the expense of others.

Investors responded favorably to Mr. Draghi’s remarks, sending the euro down by more than half a cent against the dollar, to $1.1187. Yields on 10-year German government bonds fell to a fresh all-time low of minus 0.315% as investors digested the prospect of fresh bond purchases by the ECB. French 10-year yields dropped sharply and hit 0%, their lowest ever.

The European Union has long sold more goods to the U.S. than it has bought. But that trade surplus reached a record high of €139 billion in 2018, up from €119 billion in 2017. Figures released Tuesday showed the bloc’s surplus has continued to widen in 2019, although at a slower pace, amounting to €48.2 billion in the first four months of the year.

Advisers to President Trump have complained for years that the euro is grossly undervalued. The U.S. administration has threatened to impose tariffs on Europe’s auto exports unless the bloc strikes a trade deal with the U.S.

“European Markets rose on comments (unfair to U.S.) made today by Mario D!,” Mr. Trump tweeted. “They have been getting away with this for years, along with China and others.”

His comments raise the prospect of a “nightmare scenario” in which the ECB and Federal Reserve engage in a race to the bottom on exchange rates, creating economic damage that could be aggravated by trade tariffs, said Frederik Ducrozet, an economist with Pictet Wealth Management in Geneva.

The ECB isn’t alone in considering fresh stimulus. The world’s major central banks have rapidly shifted gear in recent months, shelving plans to increase short-term interest rates and seeking instead to ease policy amid signs that the global economy is softening.

Many central banks in the Asia-Pacific region, including New Zealand and Australia, have already reduced interests in recent weeks. The Federal Reserve could signal on Wednesday that it is preparing to cut short-term interest rates, with bond markets pricing in two rate cuts this year.

The ECB is in a trickier position, though, because its key interest rate is minus 0.4%, almost 3 percentage points lower than the Fed’s.

In a sign of the headwinds Europe faces, exports from the eurozone to the rest of the world fell 2.5% in April compared with March, according to the European Union’s statistics agency Tuesday. Meanwhile, Germany’s ZEW index, a gauge of sentiment in the financial markets, fell by 19 points to minus 21.1 in June.

Mr. Draghi said ECB policy makers would consider “in the coming weeks” how to adapt its policy tools “commensurate to the severity of the risk” to the economic outlook.

In particular, the ECB could tweak the parameters of its €2.6 trillion bond-purchase program, known as quantitative easing or QE, to create room for fresh purchases, Mr. Draghi said. The bank could also cut interest rates further and introduce tools to mitigate the side effects, he said.

“The rate cutting genie is out of the bottle,” said Bart Hordijk, FX Market Analyst at Monex Europe. “This opens the trapdoor to lower levels” of the euro against the dollar.

That compares with a lackluster market reaction to the ECB’s latest policy move two weeks ago. Then, the ECB signaled it wouldn’t raise short-term interest rates through the middle of 2020, but investors were underwhelmed, sending the euro higher against the dollar.

Any move to restart QE would represent a sharp switch of course by the ECB, which only phased out the program in December and had until recently been guiding investors to expect interest-rate increases.

The ECB currently buys no more than 33% of the bonds of any individual government through its QE program. Increasing that limit could trigger fresh controversy and legal challenges in Germany, Europe’s largest economy, where officials have long been deeply skeptical of the ECB’s bond purchases.

Mr. Draghi warned Tuesday of “lingering softness” in forward-looking economic indicators, and said the risk of protectionism and vulnerabilities in emerging markets was weighing on Europe’s large manufacturing sector.

“In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required,” Mr. Draghi said.

The speech is Mr. Draghi’s last at the ECB’s Sintra research conference, Europe’s answer to the Fed’s Jackson Hole meeting, before his eight-year term ends in October. It indicates that the Italian’s impact could be felt for some time after he steps down, regardless of who European leaders name as his successor.

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